On January 17, 2024, Coinbase, a top US-based crypto exchange, and the United States Securities and Exchange Commission (SEC) presented their arguments about a pending legal dispute before a U.S. District Court.
The court hearing, which lasted for over four hours, was presided over by District Judge, Katherine Polk Failla. This insight shall reveal details of the court proceedings.
Before proceeding to disclose details of the court hearings, it is worth mentioning that the origin of the legal dispute between the U.S. regulatory body and the exchange dates back to June 2023.
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The SEC filed a lawsuit against Coinbase on June 6, 2023, alleging that 13 tokens listed on the trading platform were securities. Some of the implicated cryptocurrencies included Solana (SOL), Cardano (ADA), Polygon (MATIC), Axie Infinity (AXS), The Sandbox (SAND), etc.
Latest Details Of The Legal Battle
Following a critical analysis of SEC’s charges against Coinbase, the presiding Judge described the case as being too broad. She sought clarifications on why a crypto asset issuance would satisfy the Howey test and still be tagged a security asset.
Coinbase and the SEC agreed that the implicated tokens do not by themselves constitute securities. However, the SEC argued that the nature of trading each of the tokens on Coinbase’s platform reflected traces of an investment contract.
The regulatory body added that even if a single transaction mirrors an investment contract, it invariably means that Coinbase has defaulted security guidelines.
Contrary to the SEC stance, Coinbase argued that the transactions, which the SEC claimed to be securities, are secondary market trades that lack contractual obligations.
Stressing further on the issue of investment contracts, the SEC lawyer, Patrick Costello, remarked that investors buying the tokens are also indirectly investing in the ecosystem peculiar to the coins. In a nutshell, he hinged his argument on token values’ interconnection with their unique ecosystems.
Arguments On The Howey Test
William Savitt, Coinbase’s legal rep, tried using the Howey test justification to drive his point on the argument. According to him, an investment contract, as defined by Howey’s test must meet an enforceable contractual obligation agreement between the parties involved. He argued that in the context of Coinbase’s transactions, the Howey test definition of contractual obligation does not apply.
Countering the above claims, the SEC lawyer noted that Coinbase is bent on changing the narratives revolving around the Howey test. He pointed out that the exchange conducted the Howey test in a manner that resulted in different interpretations of certain token standings.
The SEC added that the submission above provides substantial grounds for the case to proceed while rejecting the exchange’s motion.
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After the back-and-forth arguments that saw both parties trying to make a point with their unique assertions, Judge Failla opted to play safe on the case. However, she addressed previous cases involving the SEC and other crypto firms.
Failla spoke about the SEC’s consecutive losses in the legal dispute against Ripple. However, she picked more interest in the SEC victory against Terraform Labs.
She also highlighted the difference between the current case and the SEC’s case against Terraform Labs, noting that the current lawsuit is more complicated as it does not involve tokens listed on a secondary exchange like the Terraform case.
It is left to see the Judge’s final decision in the next couple of weeks. For now, both parties can only hope for the best, as nothing is certain yet.
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